What are Unit Trusts and OEICS?
Unit trust and OEICS are pooled investment vehicles that allow large numbers of shareholders to invest in a range of shares, bonds or other assets, run by a professional fund manager.
Unit trusts and OEICS are less risky compared to buying shares directly because they invest in a range of different companies – the minimum is usually around 25 but some of the larger ones will have more than 200 holdings. However, risk will vary depending on the area they invest in and the style of their manager. There is still the possibility that you could lose a substantial proportion of your investment; the more specialist or aggressive the fund, the larger the risk.
When you invest in a unit trust, you buy a number of individual units, whereas with OEICS you purchase shares. Both are open-ended funds, which means that the number of shares or units in issue will rise or fall as investors put money in or take money out. That is different to investment trusts, which have a fixed number of shares and are known as closed-end funds.
Choosing between them requires consideration of the following factors:
How long do you plan to invest for? Investment in equities should only be considered if you plan to invest for at least three years, and ideally longer.
How much risk are you prepared to take? Any investment involves risk but some funds are riskier than others. Money market funds are the lowest risk and highly-specialist funds investing in individual emerging markets are the highest but the range in between these two extremes is wide. Bond funds are generally considered lower risk than equities, but if the fund is investing mainly in speculative or nick-named junk bonds then the risks will be higher than that for a fund which only holds Government gilts.
Are you looking for income or capital growth? Some funds, such as bond funds or income funds, aim to pay out an above average level of income while others grow the value of the assets as a priority
Where do you want to invest? The most active investors can use unit trusts and OEICS to build a diversified portfolio spread across the world, including everything from commodities to property. But there are also a large number of balanced funds, which offer a range of asset types and countries within them. Fund of funds, where a unit trust or OEIC invests in a range of different funds, are also growing in popularity.
How to Buy Them
While you can simply phone up the fund management company that runs the fund, this is likely to be the most expensive routes. Many independent advisers and internet supermarkets like Funds Network offer discounted fees.
Tax Treatment
Dividends are subject to income tax and profits to capital gains tax in the same way as shares.